Outsourcing to China

India's IT recruiting struggle
By Khozem Merchant
Published: April 6 2005 03:00 | Last updated: April 6 2005 03:00

The crowdof Indian technology companies seeking opportunities in China could profit from a visit to the Shanghai software development premises of MphasiS, a medium-sized Mumbai-based IT services company. What they heard there might send them racing back home.

"We have not cracked China," admits Jerry Rao, chief executive of MphasiS, which has IT services and call centre affiliates in India, the US and Mexico. "In Shanghai, we have 100 developers, mostly Chinese, but should have 400. Scaling up has been an unexpectedly large problem," he says.

MphasiS was among the first wave of Indian technology companies that ventured into China either as the IT partners of multinationals or via small local acquisitions. The strategy was centred on mitigating rising wages and other costs in India, spreading geographical risk and using China as a launch pad into Japan and South Korea.

MphasiS, which employs 9,000 worldwide and earned sales of $126m in the year to March 2004, bought the Shanghai centre from CapitalOne, the US credit card issuer, in October 2002.

The aim was to bypass the time-consuming hassle of setting up a technology company in a country marked by uncertain regulations. Buying an existing unit would also allow MphasiS to expand quickly and benefit from the huge rise in demand for software-related services within China, as well as from global companies looking for an IT partner in the world's fastest-growing economy.

The reality, however, has been disappointing. "We've fallen behind our expectations. One hundred software developers is a trivial number for us," says Mr Rao, who is also chairman of Nasscom, the Indian IT industry association.

It is a small number for most Indian companies. Tata Consultancy Services, Infosys, Wipro and Satyam, the big four Indian IT companies , typically add several thousand staff each quarter to their India operations, but their China presence remains small. MphasiS takes on 700 employees every three months in its IT and call centre units in India.

At issue for these companies is China's relatively immature IT services market, which means there is no fluid labour market for Chinese-speaking programmers. Companies such as MphasiS cannot quickly and inexpensively employ locally in response to asudden burst of project-based work, which is a feature of the industry. In particular, there is a lack of suitable local applicants for jobs as project managers and quality control managers, say Indian IT executives in China. In India, such people, typically with 5 to 12 years experience including stints in the US, are paid premium salaries. MphasiS has been forced to send five project managers from India to Shanghai, raising the company's operating costs there.

A lack of bilingual Chinese IT professionals, for jobs such as team leader, is also holding back expansion. One English and Chinese speaking programmer is required to oversee a team of four local developers who speak only Chinese. Because there is only a small number of bilingual programmers, they can command a salary premium of 30-40 per cent. "We can take them on but that would wreck our cost model," says Mr Rao.

These labour market deficiencies have not gone unnoticed among customers in the US, which is the biggest market for Indian IT. Whereas clients already in China might allocate work to MphasiS's Shanghai centre, those new to outsourcing in general and China in particular are nervous. "The client from Texas says 'no' to China and prefers to deal only with [our office in] Bangalore," says Mr Rao.

Mr Rao is dismayed by the slower-than-expected growth in China, but not defeated. He says there are two big reasons for staying put.

From a marketing perspective, MphasiS believes it is important to have a presence in China during this lean phase. Secondly, MphasiS is learning about the China market for the future, in the belief that it will eventually become lucrative.

MphasiS's caution is shared by some of the next wave of mid-sized companies drawing up China strategies. Patni Computer Systems in Mumbai has spent two years studying the market but is still undecided, which is notable for a company that appears to have a strong case for a presence in China: Hitachi, the South Korean electronic goods manufacturer, and clients from Japan accounted for 4 per cent of Patni's sales of $326m in the year to March 2004.

Patni's biggest China fear is scaling up. In January, the company recruited 480 junior programmers in India. "Judging by the experience of others we would never be able to do that in China. There's a lack of traction as well as an issue over the quality of software professionals," says Deepak Khosla, a senior executive at Patni.

"Our approach is based on what's good for customers, and not being able to recruit in bulk and quickly is obviously a major issue," he adds.

The irony is that the ambivalence of companies like Patni and the less than exciting experience of early entrants such as MphasiS may still have only a faint impact on those examining entry into China.

This is because domestic cost pressures in India are increasingly forcing companies to turn to China as a necessary, if perhaps premature, addition to their operating base. "Just as companies in the US and Europe view their subsidiaries in India as lower cost options to serve clients, India could look to [lower cost] China," says Gartner, a technology consultancy.

Cognizant Technology Solutions, also among India's top half dozen IT companies with sales of $585m in 2003-04, admits various cost factors have driven it to "China's door".

Foremost is soaring salaries and high attrition, driven partly by the arrival in India of IT consulting giants such as Accenture and EDS. Each departure at GE's call centres in Delhi costs the US company $5,000 to fill. A second concern is the patchy quality of labour lower down among the 290,000 new engineering graduates looking for IT jobs each year. This means companies need to spend more on training.

Cognizant plans to raise its training budget to 4 per cent of sales, which Lakshmi Narayanan, chief executive, says is "tolerable so long as we can improve productivity".

He says there is no question of the "long-term case for China", where Cognizant plans to raise its presence from a standing start now to 250 staff by 2006.

"But unless there's improvement on several fronts at home in the next two years, we'll be going to China for reasons to do with India rather than with China," Mr Narayanan says.